• The case for a stronger dollar was unequivocally made last week; with the FOMC out of the way, Fed speakers will fan out this week to spread the message; U.S. inflation data will take center stage this week; the U.S. rates story remains a true puzzle; Treasury will sell $120 bln of long-term securities this week; some fiscal stimulus was finally passed
  
• Eurozone has a quiet week; ECB policymakers are surely cognizant of the growing economic headwinds; U.K. has its monthly data dump this week; markets are still digesting last week’s shock decision from the BOE
  
• Japan reports some key data; September current account data Tuesday will be of interest; Australia reports October jobs data Thursday

AMERICAS

The case for a stronger dollar was unequivocally made last week. The Fed started tapering, the U.S. data remain strong, and the rest of the world doesn’t look so great. To top things off, Congress was finally able to pass the traditional infrastructure bill, meaning some fiscal stimulus is in the pipeline now. The U.S. economy should post a strong rebound in Q4, with the Atlanta Fed’s GDPNow model tracking 8.5% SAAR growth vs. 2.0% in Q3.

 With the FOMC out of the way, Fed speakers will fan out this week to spread the message. Clarida, Powell, Harker, Bowman, and Evans speak Monday. Bullard, Powell, Daly, and Kashkari speak Tuesday. Williams speaks Friday. While the Fed has taken pains to stress that tapering does not translate to tightening sooner rather than later, the market still does not entirely believe it. The market sees nearly 40% odds of Q2 lift-off, down from over 55% last week, while odds of Q3 lift-off are nearly 90%, down from being fully priced in previously.

President Biden reportedly met with Powell and Brainard at the White House last week. While there was no official confirmation, we suspect Biden is trying to decide who to nominate as the next Fed Chair when Powell’s term ends in February. We’ve said it before and we’ll say it again: Powell deserves another term. Period. The choice is obvious to the markets. While Brainard is certainty qualified, we think she would be better suited as Vice Chair for Supervision. Of note, Quarles remains a member of the Board of Governors but his term as Vice Chair for Supervision ended last month. Biden still needs to fill the vacant Governor’s seat that was meant for Judy Shelton, while Vice Chair Clarida’s term on the Board ends January 31.

U.S. inflation data will take center stage this week. October PPI will be reported Tuesday. Both headline and core inflation are expected to remain steady at 8.6% y/y and 6.8% y/y, respectively. CPI will follow on Wednesday. Headline is expected at 5.9% y/y vs. 5.4% in September, while core is expected at 4.3% y/y vs. 4.0% in September. The Fed’s preferred measure of inflation (core PCE deflator) won’t be reported until November 24 but seems likely to accelerate from 3.6% y/y in September.

The U.S. rates story remains a true puzzle. Despite the strong U.S. data reported throughout the week, yields actually ended the week significantly lower. Yes, some of this was the Bank of England effect, but we think that’s only part of the story. The 2-year yield ended the week at 0.40% vs. the 0.56% peak October 28, while the 10-year yield ended the week at 1.45% vs. the 1.70% peak October 21. With growth strong and wages and inflation still rising, the case for lower U.S. rates simply isn’t there.

The U.S. Treasury will sell $120 bln of long-term securities this week. $56 bln of 3-year notes will be sold Monday. At the previous auction, indirect bidders took 44.2% while the bid/cover ratio was 2.36. $39 bln of 10-year notes will then be sold Tuesday. At the previous auction, indirect bidders took 71.1% while the bid/cover ratio was 2.58. Lastly, $25 bln of 30-year bonds will be sold Wednesday. At the previous auction, indirect bidders took 70.5% while the bid/cover ratio was 2.36. Note that the $120 bln total is about $6 bln below the record levels seen in the past three quarterly refundings, as Treasury starts to pare its issuance from the elevated pandemic levels. It highlighted “modest reductions” over the three months through January, then “additional issuance-size changes will be announced quarterly in subsequent refunding statements.”

Otherwise, the data are mostly minor. Weekly jobless claims will be reported a day early on Wednesday due to the Veterans’ Day holiday Thursday. Initial claims are expected at 265k vs. 269k the previous week. Wholesale inventories and trade sales along with the October budget statement will also be reported Wednesday. September JOLTS job openings (10.4 mln expected) and preliminary November University of Michigan consumer sentiment (72.5 expected) will be reported Friday.

Some fiscal stimulus was finally passed. The traditional $1.2 trln ($550 bln in new spending) infrastructure bill was passed Friday by a vote of 228-206, with 13 Republicans voting in favor. Without those 13 votes, the bill would not have passed. The Senate has already passed it and so the bill will go directly to President Biden for his signature. Some decry the need for more spending and warn of inflationary risks. By all accounts, however, inflation is not being driven by demand but by supply, while no one can deny that the infrastructure here in the U.S. needs serious upgrading.

Now, the truly difficult part begins. Democrats must now work on the $1.75 trln “human infrastructure” bill that cannot count on any bipartisan support. Of note, Democratic centrists and progressive have a handshake deal to pass this quickly. Progressives had been delaying the vote on the traditional infrastructure bill until the details of the “human infrastructure” bill had been worked out, but many saw the ongoing intra-party bickering as a factor behind the party’s losses in last week’s elections. Stay tuned.

EUROPE/MIDDLE EAST/AFRICA

Eurozone has a quiet week. Germany report September trade data and November ZEW survey Tuesday. Italy reports September IP Wednesday and is expected at -0.1% m/m vs. -0.2% in August. Eurozone reports September IP Friday and is expected at -0.5% m/m vs. -1.6% in August. Last week, German and French IP readings came in much weaker than expected and suggest some downside risks to the headline eurozone number.

ECB policymakers are surely cognizant of the growing economic headwinds. ECB’s Makhlouf and Lane speak Monday, followed by Lagarde, Knot, and Schnabel Tuesday. Elderson speaks Wednesday, followed by Makhlouf, Schnabel, and de Cos Thursday. Lane wraps things up Friday. Next policy meeting is December 16 and a decision on QE is expected then. If the data continue to come in weak, then the doves will have a strong case for extending QE after PEPP ends in March. Of note, swaps market is now pricing in 13 bp of easing over the next twelve months, which is quite a turnaround from the 20-25 bp of tightening that was expected after the October 28 ECB decision.

U.K. has its monthly data dump this week. Q3 GDP, September IP, construction output, service index, and trade will all be reported Thursday. GDP is expected to grow 1.5% q/q vs. 5.5% in Q2. IP is expected at 0.2% m/m vs. 0.8% in August, construction is expected at 0.2% m/m vs. -0.2% in August, services are expected at 0.5% m/m vs. 0.3% in August, and the trade deficit is expected at -GBP3.3 bln vs. -GBP3.7 bln in August. The data have been disappointingly soft in recent months, which is the simplest explanation for the BOE’s about face last week.
Markets are still digesting last week’s shock decision from the Bank of England. 

We suspect BOE officials will continue with damage control efforts this week. Bailey speaks Monday, while he and Broadbent speak Tuesday. Tenreyro speaks Wednesday, followed by Mann Thursday. Haskel wraps things up Friday. WIRP suggests 50-50 odds for a hike at the next policy meeting December 16, but is fully priced in for February 3. The bank will have to work hard to regain its credibility in the coming months.

ASIA

Japan reports some key data. September leading index will be reported Monday. Real cash earnings will be reported Tuesday and are expected at -0.1% y/y vs. a 0.1% gain in August. October machine tool orders will be reported Wednesday. October PPI will be reported Thursday and is expected at 6.9% y/y vs. 6.3% in September. Despite rising PPI, there has so far been little pas through to the CPI, which is barely in positive territory. The Bank of Japan stands out as the most dovish major central bank and will undoubtedly be the last to tighten.

 September current account data Tuesday will be of interest. An adjusted surplus of JPY847 bln is expected vs. JPY1.04 trln in August. However, the investment flows will be of more interest. August data showed that Japan investors were net sellers of US bonds for the second straight month to the tune of -JPY551 bln vs. -JPY764 bln in July. Japan investors were also net sellers (-JPY139 bln) of Australian bonds for the fourth straight month and six of the past seven months. Japan investors were net sellers of Canadian (-JPY14 bln), and Italian (-JPY54 bln) bonds in August. Both have seen net selling for three of the past four months.

Australia reports October jobs data Thursday. A gain of 50.0k is expected vs. -138.0k in September, as the economy begins to reopen. The unemployment rate is expected to rise two ticks to 4.8%, suggesting little risk of accelerating wage pressures right now. No wonder the RBA’s Statement of Monetary Policy underscored the likelihood that lift-off won’t be seen until 2024. Next policy meeting is December 7 and no change in policy is expected then. Despite the RBA dropping YCC, the yield on the targeted April 2024 bond has fallen back to 0.53% from a peak near 0.72% at the end of October, as the BOE’s dovish surprise continues to ripple through global bond markets.